How to regulate single-stock leveraged ETFs? On Thursday, the entire market is watching this meeting held by the South Korean government.

A financial product that has been online for only one and a half months has already brought South Korea's highest economic decision-making level into emergency mode. Korea’s “F4” high-level coordination mechanism will hold a meeting this Thursday to study countermeasures against the impact of single-stock leveraged ETFs on the stock market. This is the first time the issue has officially entered the highest-level economic coordination platform jointly participated in by the Ministry of Economy and Finance, the Financial Services Commission, the Bank of Korea, and the Financial Supervisory Service. The trigger for the event is clear: KOSPI plunged by more than 8% in a single day this Monday, triggering the seventh circuit breaker of the year, with the market pointing directly at single-stock leveraged ETFs. These products amplify the daily price movements of individual stocks, which can accelerate price deviations during volatile sessions, resulting in a "rising when it rises, falling when it falls" amplification effect. Single-stock leveraged products were officially launched on May 27, allowing investors to bet 2x leverage on the price movements of Samsung Electronics and SK Hynix. The returns of these products are linked to the multiple of the daily price change of the underlying assets, requiring daily buying or selling of the underlying to match returns, thereby further exacerbating market volatility. Before Thursday’s meeting, Korean securities companies and asset management firms planned to convene an industry meeting on Tuesday to discuss the leveraged ETF issue and overall market conditions, to gather insights ahead of the government meeting. Regulators upgrade their rhetoric, "regret" rarely expressed Regulators’ statements have shifted from “attention” to “self-blame,” and they even directly admit structural problems. On July 13, Financial Supervisory Service Governor Lee Chan-jin hosted a closed-door meeting at the Yeouido Financial Investment Association attended by representatives of 20 asset management companies. He admitted, “There are structural problems, so it is unlikely that a clear answer can be given.” He further stated, “Given the current situation, this issue cannot be resolved at once and requires ongoing monitoring, revision, and improvement.” This reflects the deeper predicament facing financial authorities in proposing specific solutions. Regarding so-called “structural problems,” Lee Chan-jin did not elaborate. The outside interpretation is generally: First, individual investors have net bought nearly 10 trillion Korean won of these products, making forced liquidation almost impossible; second, these products were only launched after amendments co-issued by the Blue House, Financial Services Commission, and Korea Exchange, so forced delisting would damage the legal credibility of relevant regulations. He added: “This does not seem to be an area where one person can make a decision. The authorities (Financial Services Commission) may also need broad deliberation. We (Financial Supervisory Service) will do our best, but we are currently in a position to endure criticism. Asset management companies should honestly share practical demands and suggestions on the institutional level, which will become an important reference for policy decisions.” Financial Supervisory Service Governor Lee Chan-jin stated bluntly at a routine press conference on the 22nd of last month: “Regarding the launch of single-stock leveraged ETFs, I regret not trying harder to block their introduction.” Such phrasing is extremely rare in Korea’s financial regulatory context. However, on the very next day of his statement, KOSPI plunged by 10%. From June 22 to July 13, KOSPI had cumulatively fallen by more than 25%. Earlier this month, he further stated that regulators are “seriously reviewing the unforeseen consequences since the launch of these products.” Korea’s Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol stated in a parliamentary meeting last week: “Given that multiple issues have been raised, we are negotiating solutions for remedying and minimizing related problems.” Blue House Policy Chief Kim Yong-beom stated at a press conference that the F4 meeting is conducting in-depth research on the issue of single-stock leveraged ETFs intensifying market volatility, saying “if necessary, remedial measures will be decided at the F4 market condition review meeting.” Three approaches advancing in parallel: Increase margins, limit price moves, adjust leverage ceiling Before Thursday’s meeting, regulators have been exploring countermeasures via multiple avenues in parallel. According to Korea’s financial investment industry, the authorities have officially asked asset management firms to propose concrete suggestions for improving market volatility triggered by single-stock leveraged ETFs; the authorities will compile the industry's opinions before formally making policy. Measures currently under discussion in the market include three types: raising margin requirements, limiting daily price fluctuation ranges, and adjusting the leverage ratio ceiling. The Financial Services Commission will convene major securities and asset management experts on the 14th to discuss supplementary measures for single-stock leveraged products, including raising the minimum margin requirement (i.e., the amount investors must deposit upfront) and strengthening investor education before investment. Regulatory officials admit, however, that the above measures “may be only temporary patches, not a fundamental solution to the structural root of market volatility.” This means even if a decision is made Thursday, subsequent policies may face further adjustment. Data confirms the impact: Circuit breakers hit historic records On the data side, comparisons of market swings before and after single-stock leveraged ETF launch are shocking. According to NH Investment & Securities, in the 96 trading days before their launch, days when KOSPI moved by over 3% comprised 27% (26 days); in the 33 trading days from launch through the 13th, that ratio soared to 52% (17 days). By contrast, the U.S. S&P 500 has not seen a single day move of 3% or more this year. Korea Exchange data shows that as of the 13th, the securities market has triggered 35 “sidecar” (temporary halt mechanisms; 17 buy side, 18 sell side) this year, far above last year’s total of just 3, and already eclipsing the record of 26 sidecars during the 2008 global financial crisis—with July not even over. The full trading halt circuit breaker has triggered 7 times this year, exceeding half of the total 13 triggers since the mechanism was introduced in 2000. The Wall Street Journal notes: “The volatility of Korea's stock market is further amplified by leveraged products tied to Samsung Electronics and SK Hynix.” Product live for one and a half months, highest decision makers involved Since single-stock leveraged ETFs went live in Korea just about one and a half months ago, regulatory pressure has rapidly escalated from the Financial Supervisory Service to the highest economic decision-making level. At the press conference, Kim Yong-beom emphasized, “These products have been operating for about a month and a half, and the F4 will carefully assess their actual impact on the market.” Currently, expectations for tighter restrictions on such products are rising—including leverage ratio tightening, higher investor qualification thresholds, or other structural constraints, all under discussion. As market turbulence continues, criticism of the haste in launching these products within less than five months is also increasing. The direction of subsequent policy depends on the conclusions drawn at Korea’s F4 meeting on Thursday. Risk disclaimer and exemption clause The market has risks, investments need caution. This article does not constitute personal investment advice and does not take into account individual users' special investment objectives, financial situation, or needs. Users should consider whether the opinions, viewpoints, or conclusions in this article suit their specific circumstances. Investing based on this is at your own risk.